People Retiring with Student Loans May Save Money with Income-Based Repayment

If Social Security retirement benefits are a retired borrower’s only
source of income, those benefits will be tax-free. If the retiree has
other sources of income, however, a portion of the Social Security
retirement benefit payments will be taxable, along with the other
sources of taxable income.

If all of the borrower’s income is tax-free, their monthly loan
payments under income-based repayment will be zero.

If the borrower has some taxable income, the monthly loan payments may
be much lower than under the other repayment options, depending on the
amount of income.

The current poverty line for a family size of 1 is $10,890, so 150% of
the poverty line for a family size of 1 is $16,335, or $1,361 per
month. Since the monthly payment under income-based repayment is set
to zero if the calculated monthly loan payment is less than $5, a
borrower can have monthly income that is $3 higher, namely $1,364, and
still have a monthly loan payment of zero under income-based
repayment. Likewise, 150% of the poverty line is $22,065 for a family
size of 2, yielding an income threshold of $1,841 per month for a
monthly loan payment of zero under income-based repayment.

There is an important caveat: Income-based repayment is available only
for federal student loans. Parent PLUS loans and private student loans
are not eligible.

Income-based repayment usually yields a lower monthly loan payment
than strategic default. If a retired borrower defaults on his or her
federal education loans, the federal government can offset up to 15%
of the borrower’s Social Security benefit payments. That’s $354.90 a
month for someone receiving the current maximum monthly Social
Security retirement benefit of $2,366 and $176.55 a month for someone
receiving the current average monthly Social Security retirement
benefit of $1,177. But unless the retiree has significant sources of
taxable income (i.e., in excess of $30,000 per year), income-based
repayment will yield a lower monthly loan payment.